Macro Commentary
Boy, we wish the Fed would have gone ahead and raised rates. Instead we get to compound question on question. Up until this week, the questions had been “When is the Fed going to raise rates?” and “What happens when they do?”. Instead of answering one question and starting the clock on answering the second, they throw a third question on the pile, “Does the Fed see something we do not?”. There is a point where a dovish statement becomes so dovish that it negatively impacts confidence. In the announcement, the decision-making body stated that while the US remains relatively resilient the rest of the world remains weak – an odd reference since the rest of the world is not the Fed’s mandate. In addition, the Fed committee members’ projections (affectionately called the “dots”) showed one policy maker who dropped their estimate for the federal funds rate in 2015 and 2016 into negative territory. Finally, in the vote there was only one dissenter meaning there was reasonably strong consensus to delay the decision (although in another report, 13 of the 17 participants still feel the timing for the first move is 2015). Not surprisingly, the US equity market struggled to interpret the message as it oscillated between positive and negative returns to then finish the day down. Yields in the Treasury market fell abruptly back to August levels, unwinding what had been a growing expectation of a Fed funds increase. For example, the 1 year Treasury maturity which had recently peaked over 0.45% fell about 0.10% in the day back to around 0.35%.
The rest of the developed world’s equity markets had a clearer message with Europe and Japan falling around 2%. Currency impacted both of these markets. With the Fed decision pushing out the timing of an expected interest rate differential, both the euro and the yen rallied. The inverse correlation between currency and local equity markets in Europe and Japan continued to get stronger as perception builds that currency strength is a tightening of economic conditions. At this point, there is a growing narrative that the European Central Bank and Bank of Japan will have to step up their quantitative easing programs to counterbalance. The ECB at the least has already made small comments in the past month or so that supports that they are open to the idea, so we the market may get what it wishes for.